IT Outsourcing India

BANGALORE: When top officials from Infosys Technologies met executives at BT, the Indian company’s biggest customer, a few weeks ago in London, the discussions were more about helping BT cope with an almost 20-30% lower IT budget by renegotiating some of the existing projects at around 10-15% lower billing rates.

 Clearly for Infosys, which has always commanded premium rates from large customers, this could be one of many such discussions it may have to hold this year.

Infosys on Wednesday reported an almost 28.5% growth in net profit for the year ended March 2009 to Rs 5,988 crore, and said its revenues next year could fall 3.1-6.7% in US dollar terms, as the company seeks to cope with a lower demand in its top markets of the US and Europe.

The company forecast revenues of $4.35-4.52 billion for the year ending March 2010, down from around $4.6 billion the company reported for the year ended March 2009.

“The velocity of growth has slowed down, and the amount of uncertainty today is unprecedented,” said Infosys CEO & managing director S Gopalakrishnan. “While most of the contracts are worth $200-500 million at the beginning of discussions, they become smaller with the customers inviting more vendors (at least three) in order to get more competitive rates,” he added.

The country’s second-biggest software company expects billing rates to drop by as much as 6.5% this year, according to Infosys chief financial officer V Balakrishnan.

In a year when almost 69% of Infosys’ top customers have lowered their IT budgets, and more than half of them see a revival of economy only after March 2010, Infosys is preparing to cope with perhaps the worst recession it has witnessed in its almost three decades of existence.

“Discounts are being considered an investment in these challenging times, as vendors such as Infosys seek to retain their top customers over the long run,” a UK-based expert familiar with BT’s outsourcing decisions told ET on conditions of anonymity.

Experts such as James Friedman of Susquehanna International Group (SIG) say Infosys’ low revenue guidance reflects a shrinking outsourcing industry. “Between Accenture and Infosys, we are talking a ‘no growth’ situation-it seems that the demand environment is worsening because of challenges being faced by the top outsourcing customers,” he said.

At a time when top customers such as BT are attempting to lower costs by renegotiating outsourcing contracts, Infosys will find it challenging to sustain current pricing levels. The pricing for the quarter ended March 2009 declined by almost 3%, the company said. Infosys’ BT revenues could be down to almost $300 million, from around $380 million last year, according to an outsourcing expert who requested anonymity.

In a worsening economic environment, customers such as BT are also asking their vendors to give up on the premium rates for some of the niche projects, impacting average billing rates for the total outsourcing contract. Outsourcing customers are using the downturn as an opportunity to question high margins of Indian service providers.

Top five Indian software companies renegotiated almost $1.5 billion worth of outsourcing contracts since September last year at around 15% lower rates. Britain’s biggest phone firm is currently restructuring its BT Global Services (BTGS) unit, which accounts for almost half of Infosys’ BT revenues.

“BTGS’ performance could have a significant impact on Infosys’ growth expectations for FY10,” Diviya Nagarajan, an analyst at Mumbai-based JM Financial wrote in her report earlier this year. BT, which accounted for almost 9.1% of Infosys’ revenues last year, will contribute around 6.9% of the company’s business this year, down over 2%, Ms Nagarajan added.

“Infy will likely enjoy tailwinds from currency and abundant labor supply to fortress margins, and the unfortunate circumstances at Satyam may lead to customer conversion (Telstra has been in the headlines this week), but it may be hard to grow around potential declines in the top customers, and consequently, we are downgrading INFY shares to a Negative rating,” Mr Friedman added.

“Many of our clients are impacted by the financial crisis and are looking to us to help them reduce their expenses and optimize their businesses,” said S Gopalakrishnan, chief executive of Infosys. Infosys, which competes with MNC rivals such as IBM, Accenture and HP-EDS apart from other Indian tech firms including TCS and Wipro has increased the proportion of fixed price contracts in order to cope with pricing pressures.

The company had almost 35.4% of its projects being delivered under fixed-price model, up from around 31% a year ago. With around 1,04,850 employees by March 2009, Infosys also added 37 clients during the fourth quarter. The company reported revenues of Rs 21, 693, up 30% annually for the year ended March.

For Infosys, domestic software services market continues to show growth with several government and state-owned organisations seeking to award contracts of $3 billion. “We see a pipeline of almost $1 billion from the domestic market in the coming years-we are very serious about our India business,” added Mr Gopalakrishnan.

Source : http://economictimes.indiatimes.com/ 

A worldwide survey on outsourcing shows there were 12 “mega deals” in 2008 for a total contract value (TCV) of $17.1 billion (bn), compared with $12 billion for 2007, despite the slowdown in the global economy. The number of reported outsourcing mega deals awarded to a single service provider in 2008 was 12, an increase from 10 in 2007, said Gartner, the research and analysis firm.

A mega deal is worth more than $1 bn. And, while 2008 saw an increase in the TCV of such deals over 2007, it is still lower than the amounts realised prior to 2007.

“While outsourcing held up in 2008, we expect to see a slowdown in contract signings during the first half of 2009 and possibly extending into the third quarter, largely due to the tightening of IT budgets in the fourth quarter of 2008 and slow loosening of budgets in early 2009,” said Allie Young, vice-president and analyst for Gartner.

“Long sales cycles for outsourcing are the norm, depending on the complexity, scale and scope of the deals, which may lead to delayed signings. However, organisations with approval to outsource, and desperate to save money, may seek to move rapidly and shorten some steps of due diligence just to get the deal into place,” she said.

The largest IT outsourcing (ITO) or business process outsourcing (BPO) contract signed in 2008 was for a TCV of $2.5 bn. There were two of these deals, one of which was awarded to Tata Consultancy Services.

Source : http://www.business-standard.com/